Mirvac released its first quarterly operational update for the financial year 2022. Despite the ongoing impacts of COVID-19, the Group reaffirms operating EPS guidance of at least 15.0cpss for FY22, representing an increase in earnings of at least 7.1%, and distribution guidance of 10.2cpss, representing DPS growth of 3%.
Mirvac’s CEO & Managing Director, Susan Lloyd-Hurwitz, said, “There is no doubt the first quarter of FY22 was challenging. As we expected, government-mandated lockdowns in Sydney and Melbourne have slowed our recovery, with cash collection rates in our Integrated Investment Portfolio down 10% during the quarter, impacted by Retail.
“Nevertheless, Mirvac’s forward momentum continues. We maintained strong sales across our residential business, continued to progress our diversified commercial and mixed use development pipeline, and further expanded our funds under management. Our clear visibility of earnings, with 95% of Residential EBIT already secured, along with accelerated vaccination rates and an easing of restrictions in NSW and Victoria, give us confidence that we will continue to build momentum in the second half of FY22, and we remain on track to meet the guidance we provided in August.”
Part of the forward momentum for Mirvac is the commencement of their next Premium Office tower in the Sydney CBD, 55 Pitt Street. Mirvac issued notices to vacate to all remaining tenants in the building with plans to commence demolition work shortly.
The redevelopment of 55 Pitt Street will deliver around 63,000sqm of commercial and retail space in the revitalised Circular Quay precinct. Recognising the needs of future tenants in a post-pandemic world, the building has been designed to prioritise health and well-being, featuring touchless entry points, access to fresh air via an operable façade, increased biophilia, and a roof-top garden.
This is a bold move for Mirvac and comes at a time when office vacancy rates have hit a cyclical high (13%), rental growth is negative and new office supply in the CBD and competing fringe markets is also high.
Other Q1 Key Highlights
- achieved 902 residential sales, with pre-sales increasing to ~$1.3bn;
- settled 551 residential lots, and on track to deliver >2,500 lot settlements in FY22;
- completed 61 leasing deals across ~23,100sqm in the Integrated Investment Portfolio (IIP)
- maintained high occupancy in IIP at 96.8%;
- cash collection moderated to 88% 4, impacted by lockdowns in Sydney and Melbourne and concentrated in Retail;
- progressed our $28bn 5 development pipeline, with the Locomotive Workshop in Sydney substantially complete (97% pre-leased) and topping out achieved at 80 Ann Street in Brisbane (92% pre-leased);
- broadened our funds under management platform with the commencement of a new investment mandate with Sunsuper, selling down a 49% interest in the Locomotive Workshop, Sydney into the mandate. We also secured
a ~50% interest in 200 George Street, Sydney, for aligned capital partner, M&G Real Estate; - published our FY21 Sustainability Report, highlighting our strong ESG performance, including a carbon footprint reduction of 80%; and
- named best workplace in Australia to give back.
Residential
Residential pre-sales increased to ~$1.3bn (~$830m of MPC, the highest MPC balance on record) with 902 lots exchanged during the quarter. Approx 75% of the exchanges were in NSW and Vic. Of these, 90% were in master planned communities (MPC).
Owner-occupiers continued to drive sales, representing 76% of total sales. Investors represented 24%, with less than 1% offshore buyers.
Settlements are on track to exceed 2,500 lots in FY22. The default rate remains low at 2.3%.
Mirvac’s Head of Residential, Stuart Penklis, said, “Despite ongoing lockdowns in Sydney and Melbourne, we continued to see positive momentum in our Residential business during the first quarter. Enquiries and sales volumes remained elevated, and we are still seeing strong demand from owner-occupiers attracted to Mirvac’s reputation for quality and care in every detail.
“With buoyant market conditions in the residential sector expected to continue, we are on track to launch a number of exciting projects over the course of FY22, which will underpin earnings from FY23 onwards.”
Integrated Investment Portfolio
In the Investment Portfolio, Mirvac reported that cash collection rates reduced to 88% (FY21: 98%), largely impacted by Retail assets bearing the brunt of lockdowns, where cash collection was lower at 71%.
Mirvac’s Head of IIP, Campbell Hanan, said, “Leasing activity softened during the quarter, which was not surprising given the operating environment. However, anecdotal evidence from our tenants suggests there is a clear motivation to return to our CBDs, and our modern, sustainable and technology-enabled CBD office assets will help us to both retain and attract employees to our workplaces.”
In the Retail portfolio, comparable moving annual turnover sales movement of -2.5% and comparable specialty sales decline of -4.8% reveal the impacts the restrictions have had on retail trade. Customer traffic was down -24%, with 39% of stores closed 7 as at 30 September 2021 due to restrictions.
Mirvac maintained high occupancy of 97.8%, with 5.2% of tenants on holdovers as the Group seeks to retain tenants affected through lockdown.
Mr Hanan said, “Last year, we saw weakened cash collection rates in the retail sector quickly improve once restrictions eased and normalised trading conditions returned. While we expect to see a similar recovery in the second half of the financial year, supported by pent up demand for physical retail, we will continue to apply caution until we have more certainty.”
The group completed the settlement of Cherrybrook Village, Sydney, at a 43% premium to book value and progressed the remainder of our planned $600m asset sales program, including with the marketing of the Tramsheds in Sydney.
In the Office sector, Mirvac recorded occupancy of 94.4% and a WALE of 6.1 years. Cash collection rates and ancillary income was also lower, down to 97% during the quarter (FY21: 99%).
Mirvac completed ~9,130sqm of leasing deals in the quarter with activity and occupancy impacted by restrictions and
limited on-site inspections.
In the Industrial sector, Mirvac maintain occupancy at 100% with a WALE of 7.3 years. Cash collection rates dropped marginally to 98% (FY21: 100%), however leasing conditions remained strong with 7,380sqm of leases executed in the quarter.
“Record e-commerce spending meant that demand for high-quality, well-located industrial facilities showed no signs of abating during the quarter, and we were able to leverage this to secure pre-leases at our assets currently under development,” said Mr Hanan.
“Low vacancy rates in Sydney also point to better rental growth in the near-to-mid term, which we are well placed to benefit from.”
The occupancy of Mirvac’s Build to Rent project, LIV Indigo in Sydney dropped back slightly in Q1, to 79% (from 80%) as leasing momentum was impacted by restricted amenity offering as a result of lockdown measures.
“We continued to attract interest at our pilot project, LIV Indigo in Sydney, despite operating in a challenging environment and with limited opportunities for in-person inspections,” said Mr Hanan.
“We remain committed to growing this portfolio as the appeal of high-quality rental product and a superior rental experience increases.”
Commercial & Mixed Use Development
In addition to kicking off with the redevelopment of 55 Pitt Street this quarter, Mirvac also commenced demolition of 200 Turbet Street Brisbane and progressed to the design competition stage the redevelopment of Harbourside, Sydney.
The Group also progressed with the Switchyard industrial project in Auburn, Sydney, (expect to commence in 2Q22) and progressed with initial development applications for Aspect Industrial Estate and Elizabeth Enterprise Precinct
Speaking of the Commercial & Mixed Use Development activity, Mirvac’s Chief Investment Officer, Brett Draffen said, “Our $12 billion commercial and mixed use development pipeline steadily progressed during the quarter, with a number of key milestones achieved. This included construction commencement at LIV Anura in Brisbane and demolition approval for our mixed-use development at 55 Pitt Street, demonstrating our confidence in the recovery of our cities.”
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